Malaysia Airlines' Search for a Strategic Partner Continues

Background on Malaysia Airlines' Financial Struggles

Nearly six years after Malaysian sovereign wealth fund Khazanah Nasional rescued and privatised Malaysia Airlines, the carrier is still posting losses while its search for a strategic partner continues. Khazanah stated in 2014 targets for the airline to achieve break-even by the end of 2017 and return to profitability the following year. Instead, it posted MYR792 million ($180 million) in losses after tax in 2018. This attracted the attention of Malaysia’s then-prime minister, Mahathir Mohamad, who told a news conference in March 2019 that he was studying options for the airline, which include shutting it down, selling it off, or increasing investment. In 2019, Khazanah began its search for a strategic partner for Malaysia Airlines by appointing Morgan Stanley as an independent advisor. Azmin Ali, then minister for economic affairs, told the lower house of parliament in October 2019 that four entities were shortlisted, from a longlist of 20 that had been approached as potential strategic partners for the carrier’s parent company Malaysia Aviation Group (MAG). Shukor Yusof, founder of aviation consultancy Endau Analytics, is of the opinion that the turnaround plan laid out by Khazanah in 2014 was “never a realistic target”, as the Malaysian sovereign wealth fund did not take into consideration the long-running issues the airline had faced. He says, “Malaysia Airlines was slated to be profitable in 2018 or 2019 as part of the turnaround plan to turn Malaysian Airlines System to Malaysia Airlines Berhad. It was never a realistic target, because the restructuring and transformation crafted by Khazanah didn’t take into account the fundamental problems, the technical issues, and the cultural issues that plagued Malaysia Airlines for a long time.” Khazanah’s search, however, didn’t stop the media from bandying around, in September and October 2019, foreign carriers such as Japan Airlines and Qatar Airways as parties interested in the carrier. Air France-KLM came up as a possible candidate in January, prompting the Franco-Dutch airline group to issue a statement on 22 January to state it was “not a current party to the sales process”. However, the group confirmed that it “had previously been in contact with Malaysia Airlines’ shareholders”. So far, two non-airline groups had expressed their interest to acquire Malaysia Airlines. In July 2019, a group of five businessmen led by a former AirAsia Group chairman, Pahamin Abdul Rajab, is said to have met up with Mahathir to propose a turnaround plan through its vehicle Najah Air. More recently in March 2020, a private company by the name of Golden Skies Ventures submitted an offer to fully take over MAG and assume most of its debt. Cirium contacted Khazanah about GSV’s offer as well as progress of the search for a strategic investor but has yet to receive a response. The idea of a merger between AirAsia Group and Malaysia Airlines was also floated. In an interview with Reuters dated 17 April 2020, Azmin Ali, who is now the minister for international trade and industry, said a possible merger between the two carriers was one of the options considered in 2019. Shukor, however, suggests alternative options that can be considered include shutting down the existing carrier and to replace it with a newer and smaller entity, permit foreign equity investment into the carrier, or by letting existing shareholders continue pumping money into the airline.“When you shut it down, it doesn’t mean it’s the end of Malaysia Airlines. You can restart it with a leaner and more nimble carrier. This is a wonderful opportunity as under this current condition, as most of the aircraft are grounded anyway. It allows you plenty of time to rethink, restart and relook at how the future of air transportation is to be in Malaysia. I think this is totally the best way to look at it,” he says. Meanwhile, Malaysia Airlines told Cirium in an email response dated 22 April: “Malaysia Airlines is of the opinion that solutions to address the industry oversupply situation and long-term sustainability need to be addressed holistically. Whilst mergers between airlines is one option, addressing the issues via regulations and policies should also not be ignored as it could just be as effective.” It adds: “Any merger proposal will need to take into account anti-competition regulations and address the numerous implementation or integration challenges including the people aspects, and respective commitments or liabilities of both airline groups”. The global Covid-19 outbreak also means that carriers now have to focus on survival and any decision on the fate of Malaysia Airlines will also likely have to wait, at least until the pandemic eases. Malaysia Airlines says: “The impact of Covid-19 on the aviation industry is unprecedented and we have experienced significant disruptions to our business with a 94% cut in capacity, hence impacting revenue. This will necessitate a review of our long-term business plan once things have settled down, since many assumptions and parameters have changed as a result of the crisis”. In the interim, parent Malaysia Aviation Group is working with Khazanah and the Malaysian government on the financial support it needs. Malaysia Airlines says: “Our immediate priority is to tackle the impact of the pandemic and we have taken hard measures to aggressively defend our cash position including capacity and resource management, deferring non-critical spend, and implementing cost cutting initiatives across the business.” Brendan Sobie, an independent aviation analyst, says the crisis is an opportunity to conduct a broader strategic review of the industry. “The Covid-19 crisis makes it even more pressing as well as provides an opportunity to do a broader strategic review and re-think. That includes re-looking at many of the things that were already in the works but not completed before the crisis,” says Sobie. He adds: “I believe the government needs in the interim to support all the airlines to help them get through this crisis until all the bigger picture issues can be evaluated and the building blocks for the future can be put in place.” Source: Flight Global, 5th May 2020 Question 1 Elaborate TWO (2) important points from the article WITHIN THE SCOPE OF AIR TRANSPORT MANAGEMENT (BL222). In dealing with the content, you are required to make clear any reasonable assumptions you feel are necessary.  Question 2 Explain the meaning of “the industry” in the last paragraph from the article. Support your answer with ONE (1) example.Part B: Essays Answer ALL questions Question 1 With the help of diagrams, examine the assembly service and distribution service in airlines. Support your answers by providing examples.  Question 2 Explain FIVE (5) types of economic regulation in air transport industry.]